FLEETCOR Technologies, Inc. — Q2 2021 Form 10-Q
Issuer clarification: The filing is for FLEETCOR Technologies, Inc. (NYSE: FLT), not an issuer named Corpay. CorpayOne is the name given to an acquired business. Reporting period ended June 30, 2021; statements are unaudited.
Business context and results
FLEETCOR provides digital business payment solutions, including fuel, corporate payments, tolls, lodging and gift products. Results reflect three geographic segments: North America, Brazil and International. Management attributed growth mainly to higher transaction volumes as business activity recovered from COVID-19 impacts, alongside acquisitions and macroeconomic effects.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net revenue | $667.4m | $525.1m | $1,276.0m | $1,186.2m |
| Operating income | $297.6m | $212.8m | $563.6m | $413.8m |
| Operating margin | 44.6% | 40.5% | 44.2% | 34.9% |
| Net income | $196.2m | $158.5m | $380.5m | $305.5m |
| Diluted EPS | $2.30 | $1.83 | $4.45 | $3.50 |
| Adjusted net income (non-GAAP) | $268.4m | $197.4m | $510.6m | $461.9m |
| Adjusted diluted EPS (non-GAAP) | $3.15 | $2.28 | $5.97 | $5.29 |
Financial position, cash flow and debt
- Q2 revenue increased 27.1%; management reported approximately 23% organic growth. First-half revenue increased 7.6%, with approximately 7% organic growth. Q2 net income rose 23.8%; first-half net income rose 24.5%.
- Q2 operating margin expanded 4.1 percentage points. First-half margin increased 9.3 points, partly reflecting the prior-year period’s approximately $90m customer receivable write-off.
- First-half operating cash flow was $356.4m, down from $802.2m, primarily due to unfavorable working-capital timing, including receivables. Investing cash use was $163.0m, including acquisitions; financing provided $358.7m. Cash and restricted cash together increased $582.7m.
- At June 30, cash and cash equivalents were $1.301bn and restricted cash was $758.1m. Management reported approximately $2.5bn of liquidity, comprising $1.2bn of available credit-facility capacity and $1.3bn of unrestricted cash; the $1bn securitization facility had no additional availability.
- Total debt, including the securitization facility, was $5.079bn, up from $4.333bn at December 31, 2020. This included $4.079bn of notes and other obligations and $1bn securitized debt. The company reported compliance with debt covenants. A new $1.15bn term loan B matures in 2028; term loan A and revolving facilities mature in 2023.
Material changes and notable items
- Q2 growth was broad-based: corporate payments revenue rose 52%, lodging 53%, fuel 18%, tolls 10%, and gift 22% year over year. Brazil revenue declined 3.8% in the first half, largely due to unfavorable foreign exchange, while International revenue increased 19.4%.
- Fuel-price spreads were a significant headwind: management estimated a roughly $30m Q2 revenue impact and $46m for the first half, partly offset by favorable fuel prices. Prior-year first-half processing expense included the approximately $90m cross-border receivable write-off.
- Completed acquisitions included AFEX, a cross-border payments provider, on June 1, for a stated $418.7m including acquired cash and restricted cash; the preliminary net purchase price was $29.7m. The Roger acquisition, rebranded CorpayOne, cost approximately $39m. Acquisition accounting remained preliminary for certain valuations.
- On July 28, 2021, after quarter-end, FLEETCOR agreed to acquire ALE Solutions for approximately $400m, subject to regulatory approval and closing conditions. The board also increased the repurchase authorization to $5.1bn; up to $1.6bn remained available after that increase. First-half share repurchases were $416.6m.
- Interest expense was $34.7m in Q2, up 7.0%; first-half interest expense was $63.2m, down 7.1%. Interest-rate swaps hedge $2bn of variable-rate debt; $24.5m of hedge losses was reclassified to first-half interest expense.
Outlook, risks and contingencies
- No quantified full-year revenue or earnings guidance is provided in the filing. Management expected COVID-19 to continue adversely affecting 2021 revenue and earnings, but anticipated improvement through the year as economic activity recovered. The duration and effects of the pandemic remained uncertain.
- Results are exposed to transaction volumes, fuel prices and spreads, foreign exchange, interest rates, customer credit losses, and the ability to maintain funding and securitize receivables. Management’s estimates of credit losses include adjustments for COVID-related economic conditions.
- The FTC’s lawsuit alleges unfair or deceptive fuel-card advertising and marketing practices. FLEETCOR disputes the claims; summary-judgment briefing was completed July 12, 2021. The company could not estimate a reasonably possible loss or range, and noted potential legal, redress, penalty and remediation costs. A Supreme Court ruling limited the FTC’s authority to seek monetary redress under the provision invoked in the case.
- Shareholder derivative litigation remained subject to appeal or stay. Management did not believe legal proceedings would materially affect consolidated results overall, but acknowledged a particular matter could materially affect a period.
- The non-GAAP adjusted earnings measures exclude items such as stock compensation, amortization, deal costs and unusual items; consider them alongside GAAP results. Disclosure controls were reported effective, with no material internal-control changes during the quarter.
Investor verification priorities
- Reconcile reported and adjusted earnings, particularly the treatment of amortization, stock compensation, deal costs and unusual credit losses.
- Track receivables, working-capital cash conversion and credit-loss allowances; first-half operating cash flow fell substantially year over year.
- Review debt balances, available revolving capacity, interest-rate exposure and covenants, distinguishing restricted from unrestricted cash.
- Assess how much reported growth reflects organic transaction recovery versus acquisitions, foreign exchange, fuel prices and fuel-price spreads.
- Monitor AFEX purchase-accounting updates, ALE closing and financing, repurchases, and developments in the FTC litigation and related potential costs.